Reflections on White Collar Crime and Federal Criminal Law

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The College Admissions Scandal Indictment Flunks Out

Last March the U.S. Attorney’s Office in Massachusetts charged fifty people in a massive college admissions scandal. The defendants include parents, college coaches, test administrators, and the mastermind at the center of it all: William “Rick” Singer, owner of a college admissions counseling company. Singer and some of the coaches have already pleaded guilty. To date, fourteen parents also have pleaded guilty or agreed to do so, including actress Felicity Huffman and prominent attorney Gordon Caplan.

The nineteen parents who are fighting the charges were joined together in a single indictment last month. But I believe that indictment has some serious legal flaws. Investigators have dubbed this investigation “Operation Varsity Blues.” By the time the legal wrangling is over, I think the prosecutors may be singing some blues of their own.

Rick Singer, the man at the hub of the college admissions scandal

The College Admissions Scandal

The case involves two different cheating schemes designed to help students gain admission to elite universities. In the first, parents allegedly paid Singer to help their children cheat on the ACT and SAT college admissions exams. Singer would bribe test administrators to look the other way while his co-conspirator Mark Riddell coached the students on the proper answers or changed their answers after they were done. Parents typically paid Singer between $15,000 and $75,000 for this service.

The second type of scheme involved Singer bribing university coaches to admit unqualified students as recruited athletes. Parents and associates of Singer allegedly created application materials and profiles that falsely portrayed the students as star high school athletes. Parents in these cases paid Singer upwards of several hundred thousand dollars. One family in China reportedly paid Singer $6.5 million to secure their daughter’s admission to Stanford – although those parents have not been charged.

The Parents’ Indictment

All of the parents were originally charged by criminal complaint. Those who did not agree to plead guilty were subsequently indicted together. The indictment describes fourteen different incidents of cheating involving the nineteen defendants, Singer, and his associates (some of the parents are married couples involved in the same incident). The indictment charges that all of the parents, along with Singer and his associates, participated together in two different conspiracies: a conspiracy to commit mail and wire fraud and a conspiracy to commit money laundering.

Single vs. Multiple Conspiracies

Prosecutors have charged all the parents with being part of the same two large conspiracies. But the indictment demonstrates there were actually fourteen different conspiracies, one for each parent or couple that worked with Singer.

A conspiracy is a partnership in crime. The government must show that a defendant knowingly joined the conspiracy with the intent to further its criminal goals. A defendant does not need to know every detail of the conspiracy, and does not even need to know the actual identity of every other co-conspirator. But to charge defendants together in a single conspiracy, the government must be able to prove that the defendants were at least aware that other co-conspirators existed and that they were somehow mutually dependent.

In a large, far-flung criminal enterprise, sometimes the government charges one big conspiracy when there were actually a number of separate, smaller ones. The leading Supreme Court case on this is Kotteakos v. United States, decided in 1946. The man at the center of that case was Simon Brown, who had become an expert at fraudulently obtaining loans insured by the Federal Housing Administration. He acted as a broker to help a few dozen people wrongfully obtain such loans.

The government ultimately charged thirty-two defendants, including Mr. Kotteakos, with taking part with Brown in one grand conspiracy to defraud the FHA. But although each of the individual defendants had transacted with Brown to obtain their loans, they had no connection to each other at all. The government’s evidence actually showed there were at least eight separate conspiracies, with nothing in common other than that they involved the same kind of crime and Brown took part in all of them.

The Supreme Court ruled that this error in how the conspiracies were charged required the convictions to be reversed. The government had characterized the arrangement of the defendants as spokes on a wheel, with Brown at the hub. But the problem, the Court said, was that there was no rim to enclose the spokes – nothing connected them to each other. And without a rim you did not have a single “wheel” – or a single conspiracy.

The Court concluded that the individual defendants were potentially prejudiced as a result. It noted that with a massive trial of multiple defendants there was a substantial risk that evidence against one defendant would “spill over” and the jury would improperly use it against other defendants as well. As Justice Rutledge wrote:

Guilt with us remains individual and personal, even as respects conspiracies. It is not a matter of mass application. . . True, this may be inconvenient for prosecution. But our government is not one of mere convenience or efficiency. It too has a stake, with every citizen, in his being afforded our historic individual protections, including those surrounding criminal trials.

A wheel needs a rim

The Kotteakos Problem

If I were writing a final exam to test my students’ knowledge of the principles underlying Kotteakos, it would be hard to come up with a better example than this college admissions case. The indictment alleges fourteen different cheating schemes, each involving Singer and one parent or couple. But the different schemes have no connection to each other. Each is like a spoke in a wheel, with Singer at the hub, but there is no rim to connect the spokes. The success or failure of one parent’s scheme had nothing to do with what happened with any other parent. Indeed, they had no reason to know the other parents even existed. This is a textbook Kotteakos problem: the government has charged as a single conspiracy what really should be fourteen different conspiracy cases.

Like the defendants in Kotteakos, the defendants in the college admissions case are entitled to their own trials. If you are a parent who paid Singer $25,000 one time to cheat on one exam, you don’t want to be in a massive trial with a dozen other parents who paid him hundreds of thousands of dollars and concocted phony athletic profiles for their children. Your individual case is going to look a whole lot worse in that context, and there’s a risk the jury would hold it against you.

This particular flaw likely won’t be fatal to the government’s case. The parents who want to go to trial should be able to move to have their cases severed from each other and prosecuted separately. But it does mean the government is not going to be able to present the entire story of Singer’s years of misconduct with multiple parents in one massive trial, as it would like to do. It’s going to need to proceed in separate cases. And if that means Singer and others end up testifying multiple times, then with each successive trial there is more prior testimony to impeach them with and a greater likelihood someone will testify inconsistently.

The parents have already raised this issue with the court. Lawyers for a number of them wrote a letter to the chief judge before they were even indicted, claiming the government was “judge shopping” by indicting them all together in order to get all the cases before a particular judge. And one couple, Gregory and Amy Colburn, have already filed a motion to dismiss based in part on Kotteakos. (They are unlikely to get a dismissal on that ground; the most likely remedy is a severance from the other defendants and a separate trial.)

The Money Laundering Charge

The second count in the indictment charges all of the parents with engaging in a single money laundering conspiracy with Singer. In addition to the Kotteakos issue, I believe this conspiracy suffers from a second flaw: the underlying money laundering allegation is legally deficient.

Money laundering prohibits engaging in financial transactions with criminal proceeds in order to disguise where the money came from or otherwise “clean it up” so the funds will appear to be legitimate if they are discovered. Saul Goodman in “Breaking Bad” provided this classic explanation:

In the college admissions case, the parents did not pay the coaches or universities directly. They sent their money to a nonprofit that Singer created called the Key Worldwide Foundation. Singer then used money from the foundation bank account to pay bribes to the coaches and test administrators. He would also send a receipt to the parents for their “charitable contribution,” and many of them used that to claim a tax deduction.

The government has charged that using the foundation account to make the bribe payments disguised the nature and origin of those payments and thus constituted money laundering. In paragraph 272, the indictment says this was designed to “conceal and disguise the nature, location, source, ownership, and control of bribe and other payments in furtherance of the fraud scheme.” But concealing the source of bribe payments is not money laundering, unless those payments themselves are criminal proceeds.

The Proceeds Problem

Money laundering must involve dirty money – that’s why it needs to be laundered. Laundering must involve criminal “proceeds,” defined in the statute as property “derived from or obtained or retained . . . through some form of unlawful activity.” An easy way to remember this is that money laundering needs to be a “downstream transaction” – it’s something you do with the money you made from criminal activity once you’ve got that money in your control.

As an analogy, imagine you were starting a business. You wouldn’t consider the seed money that you use to get it off the ground to be “proceeds” of the business. The proceeds would be the money generated by the business once you get it up and running.

The payments by Singer, with money received from the parents, involved “clean” money. As to Singer and the parents, the funds were not money “derived from or obtained” by criminal activity; it was the money used to engage in that activity. Those payments are not money laundering, they are the predicate crimes that will generate proceeds. It’s like the seed money for starting the business. But the government has improperly charged the execution of the predicate crime itself as money laundering.

For the coaches and test administrators, bribe money received would be proceeds obtained through criminal activity that could later be laundered. For the parents, the proceeds of the fraud scheme is actually the college admissions slots that they obtained. But paying the bribes, using clean money, is not a laundering event just because it was done through a separate foundation. Running the payments through the foundation is part of the underlying fraud scheme and may give rise to tax charges for improper deductions, but it’s not money laundering.

There is one allegation in the indictment of international money laundering – money sent across the U.S. border to promote criminal activity. That allegation involves one parent, David Sidoo, who sent money from Canada. Under that money laundering theory the funds do not need to be criminal proceeds, so that one allegation could survive. But if Sidoo’s case gets severed from the rest of the parents, as ultimately seems likely, then I believe the money laundering allegations against all the other parents will not hold up.

The Mail and Wire Fraud Theories

The government has charged two different kinds of mail and wire fraud. Traditional mail and wire fraud requires the government to prove the defendants defrauded the victim of money or property. The other theory, honest services fraud, requires the government to prove the defendants deprived the victim of fair and honest services that someone owed that victim.

Honest services fraud requires a relationship of special trust and confidence that gives rise to the duty of honest services. It’s a common theory in political corruption cases, because politicians are deemed to owe a duty of honest services to their constituents. If a politician accepts bribes or kickbacks, he or she can be charged with defrauding the public of its right to the politician’s honest services. The theory also applies to private sector relationships where such a duty exists, including the duty an employee owes to an employer. An employee who accepts bribes in connection with his or her employment may be charged with defrauding the employer of its right to the employee’s honest services.

The government relies on two different honest services theories in this case. The first is that the university coaches owed a duty of honest services to the universities that employed them and that duty was violated when they took bribes to admit unqualified students. The second is that the test administrators who allowed Singer’s associate to facilitate cheating on the ACT and SAT in exchange for bribes violated a duty of honest services that they owed to the testing companies.

The coaches clearly owed a duty of honest services to the universities, so that won’t be an issue. For the test administrators, it’s a closer call. They apparently are not employees but independent contractors. Normally an arms-length contractual relationship will not give rise to a duty of honest services. The government will have to argue that the testing companies were unusually reliant upon the integrity and expertise of the test administrators, and that gave rise to a fiduciary duty greater than that involved in a typical contractual relationship. That may ultimately hold up, but it will be contested and I don’t think it’s a slam-dunk for the government.

The greater issue when it comes to honest services fraud is going to be proving the parents actually conspired to commit that offense. Honest services is essentially a bribery theory. To enter into a conspiracy to commit honest services fraud, the parents would have to know that bribes were being paid, or at least be willfully blind to that fact. Singer clearly knew that, but it’s far less clear that any of the parents did. Parents may be able to argue they thought Singer was just making hefty contributions to the universities or paying someone to cheat on the tests but knew nothing about any bribery or honest services violations.

I think the government’s strongest theory is mail and wire fraud involving property. The allegation is that the parents and Singer conspired to deprive the universities of property in the form of valuable admissions slots that could have been given to deserving students. There’s no question the parents knew they were involved in that scheme. They would not need to know all the details concerning the bribes; they knew they were depriving the university of that admissions slot through some deceptive means.

A secondary theory in the indictment is that test scores and the tests themselves were property of the testing agencies and that the defendants defrauded the agencies of that property. That seems shakier to me, particularly the allegation that test scores qualify as “property” for purposes of mail and wire fraud. In their motion to dismiss the Colburns have also challenged this theory.

What Lies Ahead

Prosecutors have indicated that other parents were involved in the schemes, and more charges may be coming. Some of the students involved also have received target letters, indicating they potentially could be charged as well.

As for the cases already pending, expect a lot of legal wrangling. The parents should be able to get their cases severed from each other. Legally, some of the mail and wire fraud charges will likely hold up, but I don’t expect the money laundering charges to survive. Factually, it’s going to vary case by case, and some of the parents are going to be able to mount a strong defense. Prosecutors are going to face some hurdles trying to prove that the parents’ actions were criminal and not merely sleazy.